What are the emerging risks in financial services 2023?
While early 2023 presented unique challenges to financial institutions in the areas of interest risk and credit risk, cyber risk still dominates many of the surveys. In the Bank Director survey, cybersecurity came in as the second highest risk concern for financial institutions at 83%, with only interest risk on top.
A spectrum of risks
The opacity of AI and machine learning models creates inherent risk, as does the increasing of interconnectedness among financial markets and institutions. Systemically important firms and infrastructure could fail if the fintech or new third-party dependencies upon which they rely fails.
Rising deposit rates, broader market liquidity contraction, and increased reliance on wholesale funding started to impact net interest margins through the first half of 2023. Competition for deposits and higher interest rates are raising deposit rates.
Emerging Risks are new or future risks whose hazard potential is not yet reliably known and whose implications are difficult to assess. These risks may evolve over time from being weak signals to clear tendencies with a high potential for danger.
These include post-pandemic economic impacts, extended natural disasters such as the wildfires, record high temperatures, rising social-political tensions with potential military consequences, cyber warfare and supply chain fragility.
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan.
There are many ways to categorize a company's financial risks. One approach for this is provided by separating financial risk into four broad categories: market risk, credit risk, liquidity risk, and operational risk.
Banking Turmoil 2023
The collapse of banks, such as Silicon Valley Bank and First Republic Bank, resulted from deficiencies in risk management and a lack of proactive supervision; they are unrelated to the bad loan practices of the subprime mortgage crisis of 2008.
San Francisco-based First Republic Bank goes down as the second-largest failure in U.S. history. Santa Clara, California-based Silicon Valley Bank follows at number three on the all-time list and New York City-based Signature Bank is the fourth-largest bank to fail.
The OCC has defined nine categories of risk for bank supervision purposes. These risks are: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation.
What is the operational risk faced by banks?
Operational risk has been defined by the Basel Committee on Banking Supervision1 as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.
Techniques and Tools for Identifying Emerging Risks
One way to identify new risks is through "horizon scanning." This process involves examining external information to uncover potential opportunities and threats. You can use this information to support strategic decision-making and business preparedness.
Horizon scanning is a technique used across a wide range of sectors to help identify a range of potential issues and risks that could impact the organisation in the future as a result of the complex and connected world in which the organisation operates.
Fiscal crises tend to be the greatest economic risk factor in countries for which economic growth is erratic and could be derailed by any number of national or global fiscal events.
A mild recession could hit the U.S. in the first half of 2024, Deutsche Bank analysts said in a new global outlook Monday, pointing toward softening economic data. The lagged impact of interest-rate hikes will trigger a recession, though it won't be a severe one, they said.
Economic growth is projected to slow in 2024 amid increased unemployment and lower inflation. CBO expects the Federal Reserve to respond by reducing interest rates, starting in the middle of the year. In CBO's projections, economic growth rebounds in 2025 and then moderates in later years.
Based on this, financial risk can be classified into various types such as Market Risk, Credit Risk, Liquidity Risk, Operational Risk, and Legal Risk.
People Risk – People risk is the risk of financial losses and negative social performance related to inadequacies in human capital and the management of human resources.
Credit risk, one of the biggest financial risks in banking, occurs when borrowers or counterparties fail to meet their obligations.
Our experience from working with organisations across multiple industries suggest emerging risks emanate in two forms. Shifts in the internal or external operating environment will expose the organisation to a wholly new set of circ*mstances and risks that have previously never been identified.
Is 2023 a financial crisis?
The U.S. economy avoided the recession forecast for 2023. Experts now say a soft landing or mild recession is possible in 2024. These tips can help investors prepare for the unexpected.
Nearly 2 in 3 Americans (65%) had to put off a major financial milestone in 2023, with 28% of Americans putting off taking a vacation, 21% putting off buying a car or paying off credit card debt, 18% putting off starting an emergency fund and 17% put off contributing to their retirement savings.
Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent.
J.P. Morgan Chase is the number one bank in America in terms of total assets held, according to the Federal Reserve.
The collapses of Silicon Valley Bank and Signature Bank in March 2023—then the second- and third-largest bank failures in U.S. history—took consumers by surprise. Subsequently, three more banks failed in 2023: First Republic Bank in May, Heartland Tri-State Bank in July and Citizens Bank of Sac City in November.
